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Quapaw Tribe’s Downstream Casino Underlies Lawsuit

Carol Berry

12/21/11

The Quapaw Tribe of Oklahoma’s $300 million Downstream Casino, located in northeast Oklahoma near the Kansas border, has played a key role in two non-Native gaming enterprises’ abandonment of casino plans. In counterclaims, one of the enterprises unsuccessfully sued the other for breach of contract and appealed December 12 to the U.S. 10th Circuit Court.

In the controversy between the two limited liability corporations, the proposed casino operations in southeast Kansas near Downstream were abandoned after a “southern strategy” failed to acquire state approval for management of a second potential casino in Wellington in south central Kansas.

The initial casino planned in Cherokee County, southeast Kansas, had immediate access to Interstate 44 and was close to gaming markets in Oklahoma, Arkansas and Missouri. It would have been on property with rights held by HV Properties of Kansas, whose members had advocated for legalized gambling in Kansas. Kansas Penn Gaming, which was formed by Penn National Gaming Inc., agreed to pay $2.5 million to acquire HV’s interest in the location.

Kansas enacted lottery legislation in 2007, allowing the establishment of one lottery gaming facility in each of four “gaming zones,” including southeast and south central gaming zones, both key to the enterprises’ plans. KPG, which sought to manage the proposed southeast Kansas casino, “engaged in efforts to stop the development of the Quapaw casino,” fearing its economic competition, but the efforts failed.

“Those efforts included investigating whether the proposed casino development was in violation of applicable environmental regulations, and participating in and financing a federal lawsuit against the United States Department of Interior, in which it was alleged that the federal government had improperly acquired and conveyed portions of the Quapaw’s Oklahoma land, such that the land could not legally be used for gaming purposes,” the court said.

In 2008, when the Quapaw opened its casino, it “operated under a lower tax rate than the 27 percent rate that would have applied to any casino operated in (Kansas’ state-determined) southeast gaming zone,” the court said. “After Downstream opened, KPG’s analysts concluded that, even with a phased capital investment,” a casino would not generate an adequate return on investment.

Opening of the Downstream Casino “was the single most critical factor” in KPG’s determination that the southeastern casino was not commercially viable, according to court records.

However, KPG and its parent Penn National believed that a southeast Kansas casino, coupled with a south central casino, could be profitable, the court noted. The southern strategy went down when the southeastern Kansas location was approved by the state but Penn Sumner’s (a newly created subsidiary of Penn National) management contract for the south central zone, was not approved.

KPG notified the state of Kansas and HV that it was withdrawing its application for the southeast gaming zone, HV served KPG a notice of default, and further claims and counterclaims went to district court, where it was determined that Penn National’s southern strategy and KPG’s actions were undertaken in good faith, a finding affirmed by the 10th Circuit.

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